Employers are urged to tread carefully over share rights

EMPLOYERS will need to carry out “serious groundwork” to future proof ‘shares-for-rights’ schemes introduced under a new Government initiative, according to legal experts in Yorkshire.

Employees can take a minimum of £2,000 in company shares as long as they are prepared to give up certain statutory rights, such as unfair dismissal claims, flexible working requests and statutory redundancy pay, under the new scheme, which has just come into force. The first £2,000 worth of shares received are free from income tax and national insurance contributions.

Andrew Rayment, employment partner at Walker Morris in Leeds, said: “Engaging and incentivising employees with shares is a good and laudable concept. However, employers will need to do some serious groundwork to make such schemes future proof.

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“Share rights can be a ‘hot potato’ and so it is essential that share provisions are agreed accurately and unambiguously at the outset with employees to avoid argument. Otherwise, what’s the point of negating the risk of an unfair dismissal or redundancy pay claim if the effect is to replace it with a potentially more costly and complex legal dispute with a recently departed employee?”

Tom Moyes, employment associate solicitor at Blacks Solicitors in Leeds, also warned that employers must approach the practicalities of implementing such schemes with caution. He said that if the new shareholder contracts are implemented without care, the risk of an unfair dismissal claim could be replaced with “equally expensive and complicated minority shareholder litigation”.

“Equally, employees may be reluctant to give up employment rights in return for shares – especially if they have little control over decision-making in a business,” he added.

For those companies wishing to pioneer the scheme, experienced senior executives at large corporates who are familiar with share incentivisation schemes and comfortable with an element of risk may take the view that the pros outweigh the cons, Mr Rayment said. “For SMEs, it would make sense to provide a set of detailed FAQs covering taxation, share valuation and the mechanics of the share agreement including details of any ‘good/bad leaver’ provisions. 

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“This may help to serve as a filter for those businesses likely to be put off by the detail and could also save them wasted adviser’s fees.”

Despite his words of caution, Mr Moyes said that the principle of the employee shareholder contract is “undoubtedly a commendable one”.

“It’s particularly well-timed, given that there are signs of an economic recovery. And it may be seen as an attractive option for employers – particularly start-up companies with limited resources who want to foster and cultivate a highly motivated workforce.”

But Sean Hick, employment executive at Brilliant Law, in Leeds, said that the scheme “runs the risk of being one of those wonderful concepts that fails to bear fruit”.

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“According to the British Chamber of Commerce, very few companies are actually interested in the employee shareholder scheme,” said Mr Hick.

He also warned that issuing extra shares is likely to dilute the value of the company.